Question

which of the following statements is not correct?

a) the evaluation of the ending inventory affects the current ratio of a company

b) one of the ratios to determine a company's liquidity is the inventory turnover ratio

c) solvency, like liquidity, addresses a company's ability to settle its current liabilities within one year

d) most companies in Canada list their liabilities in order of their due date, starting with those liabilities that are due first

Answer 1

The right option is option (b) one of the ratios to determine a company's liquidity is the inventory turnover ratio is an incorrect statement.

Explanation- The liquidity ratio tells about the short term solvency of the company and for determining short term solvency of the company the ratios which are used are:

• Current ratio

• Quick ratio

• Cash ratio

• Basic defense interval

• Net working capital ratio,etc.

Thus these are the ratios which determine a company's liquidity.

The inventory turnover ratio is an activity or performance ratio which measures the efficiency of the company that how a company manages its assets.

So, a company's liquidity is not determined by inventory turnover ratio instead it is determined by the various liquidity ratios.

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